Finance Committee on April 21st, 2016

[France St-Hilaire]

I would like to go back to the comment I made earlier. Income tax as it relates to the reduction of inequalities is a matter that has to put in perspective. The income tax system can only to some extent be used to counter the growth of inequalities. Transfers are supposed to play that role. However, we know that there's still work to be done on transfer programs, whether we are talking about social assistance, employment insurance, assistance for seniors, or other things.

The measures contained in the federal budget will help to make our system more progressive. However, there is probably still work to be done there too.

With regard to the middle class, it might have been preferable to focus on it, given how much it will cost in uncollected tax revenues to reduce the rate of the second tax bracket.

Since all of these measures interact, we will have to see what combined effect they will have. We will have to take a step back and take stock, to see whether the objective has been reached.

As for undertaking a review of the income tax system, I think that is very important. Indeed, several tax measures are particularly beneficial to those with the highest incomes, a fact which also undermines the progressive nature of the tax system.

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Veall, do you have a fairly quick comment?

[Dr. Michael R. Veall]

Sure. On inequality, as has been spoken about, I would focus on tax preferences and on transfers. In terms of reform, I do believe there is a need for an important reform. One focus should be the sorts of problems for the tax transfer system 20 to 30 years from now. Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Mintz.

[Dr. Jack Mintz]

That's a long question, but I have a few very quick responses.

To be frank, I am less concerned about inequality; I've always been more concerned about poverty. We have addressed seniors' poverty to some extent, but not with respect to single seniors. I was glad with the action taken in the budget with respect to the top-up of the GIS in that respect. We do have a serious issue of redistribution going on from working people to elderly people, things like income splitting, the OAS, and other things that we have to remember and ask whether this is the appropriate redistribution we wish to have, when we have some poverty issues to deal with among working people.

In my view the important thing about tax reform in general is giving it a framework. Usually the best types of tax reform are ones that lower rates, not raise them, and ones that broaden the tax base to make things more neutral in the business tax structure. In the personal tax structure, it's also to achieve more neutrality among equal resource taxpayers, and also to ensure that we have the appropriate progressiveness in the tax system. When you look at the calculations on progressivity, we do have a progressive tax system in Canada. There have been publications on that recently, and if one looks at this carefully, I think you'll find that the only question is how progressive you wish to make it. We have made it more progressive over the past number of years—quite the opposite of what people argue. I think that generally the important thing about tax reform is to give a government the framework that will allow it to dismiss some of the bad ideas that often come about and lead to erosion and narrowness of the tax base and ineffective incentives.

[The Chair, Liberal, Wayne Easter]

Ms. Raitt.

[Lisa Raitt, Conservative, Milton, ON]

What I'm taking away from the testimony today is that to achieve this tax cut, which is essentially 90¢ a day for the average Canadian in this band of income, we are going into debt and are risking unwanted effects on growth. When the parliamentary budget office testified and wrote their report, they indicated that the changes would drag down the real GDP in the future, which is of concern for me.

Dr. Mintz, a couple of meetings ago, a Liberal member of this committee wanted to know if any studies in the world showed that people were deterred by income tax rates when those people made more than $217,000 a year. I think in your comments you pointed to some information and studies that show that growth and decisions are affected. Anecdotally, I would say that my research has shown—and maybe you can enlighten us as well on talent erosion in the country—that when you're competing for Canada's brightest minds in technology, when Google and Twitter are offering starting salaries of $200,000 for somebody coming out of a very good university, I would assume that's going to play into their determination of where they want to live and work. With that, Dr. Mintz, I'm wondering if you could talk a little about your analysis, which you mentioned before, of how growth in the end can be affected by having this increase in the top rate.

[The Chair, Liberal, Wayne Easter]

Dr. Mintz.

[Dr. Jack Mintz]

Well, the survey that I mentioned by Will McBride of the Tax Foundation was pretty astounding in including 23 papers written on that subject. It looks at what happens when you make the system more progressive, what it it does to growth rates. I think that by and large most economists would agree that income taxes do the most harm to the economy. Corporate taxes do more damage than the personal tax. If you increase the top rate, you will hurt growth. This comes out in a lot of the studies that have been done. They're cross-sectioned. They look at countries across the world. They also look across different states in the United States. I think the numbers are there.

Anecdotally, or at least by experience, we know that when you are hiring top talent—whether it's young people or people for CEO positions—taxation can play a role. It's not the only thing, but it can play a role. In fact, often companies, when they must bring people into Canada, have to pay equalization to make up for the higher taxes here. That adds to the cost of running the business. If higher rates dissuade people from coming here, because they see Canada as a high-tax country, that will have a negative impact on our talent.

Past studies on talent and the brain drain have shown that there's an impact. The one thing that could be done, which I've never see anyone do, is to look at the income tax forms that the Canada Revenue Agency collects. People indicate on that form whether they've changed provinces and whether they've moved out of the country. They indicate whether they've become a non-resident. It would be nice to start looking at the data to see how taxes might result in people actually moving.

Philip Bazel and I did a paper on the HST in Alberta. We found that until recently, about 25% of the personal income tax base in Alberta was what you might call high-income households, those with more than $500,000 in annual income. That's a lot of money. In fact, it's way beyond any other province.

We know there were many people who, particularly when they got towards retirement, created residency in Alberta. It's not hard to do that, especially if you decide you like skiing. It'll be interesting to see is whether the recent personal income tax hikes in Alberta are leading to a migration of high-income people out of the province.

[Lisa Raitt, Conservative, Milton, ON]

In fairness, if the government's motivation for introducing the middle-class tax cut is, one, to deal with income inequality, and two, to spur growth of the economy, on both of those fundamental promises, in my opinion, this act fails.

I have one other question on income inequality.

Mr. Zorn, I understand that you may have expertise in guaranteed annual incomes, or you have some knowledge of guaranteed annual incomes and fairness.

[Nicolas Zorn]

Indeed.

[Lisa Raitt, Conservative, Milton, ON]

I'm wondering if you could talk a little bit about this. This committee wanted to study the topic of a guaranteed annual income. Do you think that's an appropriate thing for us?

[Nicolas Zorn]

First of all, to an extent, Canada already has a partial universal...which is pretty much a paradox, but you get the point. Would it reduce inequality or not? Would it be a good thing for the low-income earners? It all depends on the parameters of the measure. It can make a lot of people worse off. It would be a lot of money going into a social program that could go instead into public services or more specific transfers. I'm not talking about a really narrow means-tested program. If it were universal, you'd be putting a lot of money on the table. Right now, seniors get $16,000 per year in transfers. If you don't want to have anybody worse off, you have to give everybody $16,000, or else you adapt it a little bit to the needs of the people.

To answer your question, it all depends on the parameters. That is a question with no easy answer.

[The Chair, Liberal, Wayne Easter]

Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

I thank all of you.

With the greatest respect, I would like to correct what Ms. Raitt said. She mentioned that the tax cut would give the average Canadian 90¢ a day. That is not quite accurate. The average Canadian will not benefit from a tax cut, since we are talking about Canadians who earn $45,000 or more. The average is well below that, which was in fact mentioned by Mr. Zorn in his presentation. So when we talk about 90¢ a day, that does not apply to the average Canadian, but to Canadians who have higher incomes.

Mr. Zorn, I really liked your presentation and your report on Bill C-2.

My questions will be addressed to Mr. Zorn, Ms. St-Hilaire and Mr. Veall, if I have the opportunity.

You will have looked at the report of the Parliamentary Budget Officer on the impact of the tax cut and on an alternative measure which would have been to reduce the first tax bracket by one percentage point. Rather than reducing the second one from 22% to 20.5%, we could have reduced the first from 15% to 14%. Of course, this is a hypothetical measure, since the government decided not to take that route.

I would nevertheless like to hear your opinion, Mr. Zorn. According to your knowledge of the group of experts and the methodology, how would such a tax reduction have affected inequalities overall?

[Nicolas Zorn]

One comment was made often about that measure in particular. If the government's two objectives are to provide a tax cut and help the middle class, I must say that that would indeed bring about a tax cut. However, to help the middle class, you would need a measure that better targets that group in particular. For instance, if you reduce the first tax bracket rather than the second one, more people would benefit from that tax reduction. To offset that, it would be desirable that the measure not also benefit all of those who have higher incomes, those who earn $200,000 and more. If that is the objective of parliamentarians and the government, the higher tax brackets can be adjusted in order to establish a certain balance.

This could have a greater impact on economic growth. The higher your income, the more money you save, whereas you spend all of your income if your income is low.

That is my answer.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Ms. St-Hilaire, what do you think?

[France St-Hilaire]

An article was written by Mr. Richard Zuker, a former official of the Department of Finance, for the Caledon Institute of Social Policy. He studied the matter to see who would benefit from the decrease in the second tax bracket. The problem is that not only do you benefit more from that reduction when you are near the top of the scale, but in addition, those who are at the very top of the scale benefit from it more than anyone.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

According to our calculations, someone who earns $210,000 a year, despite the fact that the last $10,000 is taxed more, will benefit from an overall tax cut that is higher than someone who earns $62,000 a year.

[France St-Hilaire]

That is true. One way of recovering those funds would be to adjust the third bracket also, in addition to the second, that is to say increase it in order to recover a little money from that tax cut, if you really want to target the middle class.

You propose a reduction in the first tax bracket. But then you still have the same problem, which is that if you reduce it, a good part of the tax cut will benefit everyone. Once again, it's a matter of targeting and objectives.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

What do you think about that, Mr. Veall? I don't know if I need to repeat my question. I would simply like to hear your opinion as to the impact on inequalities of an alternative measure, which would have been to reduce the first tax bracket from 15% to 14%, rather than the measure contained in Bill C-2 which reduces the second tax bracket from 22% to 20.5%.

[The Chair, Liberal, Wayne Easter]

Mr. Veall.

[Dr. Michael R. Veall]

If we think only in terms of income tax, if you put the reduction at a lower level, then it has a greater effect on reducing inequality. You have to think about these things in terms of all the possible measures that may be changed, but in terms of income tax alone, that would certainly result in a greater reduction in inequality.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

The measure in Bill C-2 was among the most discussed topics during the election and after it. It is supposed to provide a tax cut to the middle class. However, everyone agrees that that is not really the most effective way to help the middle class. That is the conclusion I have come to.

The government points out that it is the first in a series of measures. The second, which is also contained in the federal budget, is the Canada Child Benefit. However this will not help seniors who earn less than $45,000 a year, nor childless couples where both spouses earn less than $45,000, nor single people who earn less than $45,000. In the final analysis, none of these people will derive any benefit from these measures that are supposed to reduce inequalities.

Is that also your opinion?

[France St-Hilaire]

There are already measures to help seniors, such as the Guaranteed Income Supplement.

The Canada Child Benefit helps families that have children. Among the studies that were done, the one done by Luc Godbout from the Université de Sherbrooke considers all of the measures in the 2016 budget and their impact on the various types of families with children, including single-parent families. It is clear that the middle class will benefit the most, in the income level we are talking about.

However, single people and childless people receive no benefit from this measure. They can benefit however from the reduction in the second tax bracket, if their income is in that bracket.